Common Tax Errors That May Result in Substantial Financial Losses Identified by Professionals
Revised Base Article:
As the bustle of tax season winds down, many folks breathe a sigh of relief upon receiving a sizeable refund. But according to tax gurus, this popular approach might actually be burning a hole in your wallet.
Mark J. Kohler, M.PR.A., C.P.A., J.D., the Founding and Senior Partner at KKOS Lawyers, and Timothy Wingate Jr., an IRS-certified tax specialist and founder of G+F Business & Financial Consulting, warn that taxpayers often fall into common pitfalls - correction of which can pave the way for smarter financial decisions all year long.
Here's how average Joe and Jane are getting taxed wrong and what you can do to steer clear of costly mistakes:
1. April 15 Isn't Always a Hard Deadline
It's a common belief that meeting the April 15 deadline is the end of the world if not met, but that's far from the truth.
"Contrary to popular belief, it's not the apocalypse if you don't file your personal 1040 tax return by April 15," Kohler explained. "In fact, it can be strategic to not file and instead request an extension. An extension gives you time to gather all your records."
Wingate echoes the sentiment, offering savvy suggestions for extending the deadline smartly. Here's how to seamlessly request an extension:
- Submit Form 4868 by mail and request return receipt.
- Enlist the help of a tax professional to streamline the process.
- Pay any outstanding tax amount to the IRS before April 15 to evade penalties while filing an extension.
- Apply for an installment agreement with the IRS to settle your tax bill in installments.
Although an extension will push your return deadline to October 15, it doesn't postpone the obligation to pay any taxes due by April 15. To dodge penalties or interest, send a payment by the deadline, even if your paperwork isn't completed.
2. A Big Refund Ain't Always a Good Thing
Most folks smile at receiving a big refund check, but Kohler contends that this mindset needs a complete overhaul.
"Our greatest expense in life? Taxes," he declared. "If we can minimize that, we have more cash to invest in revenue-generating ventures. That's the essence of tax planning."
Instead of aiming for a fat refund, strive for a zero balance and increase your take-home pay throughout the year. Consult a tax advisor about tweaking your withholdings, contributing to retirement accounts, or making strategic investments to minimize taxable income.
3. Side Hustles Must Be Run Like Businesses
With nearly 40% of Americans engaged in side hustles, it's more essential than ever to treat that income as a serious business endeavor.
"Side hustles are not merely additional income streams,” Kohler urged. “They're tax planning opportunities. But too many people miss out because they don't maintain records or take advantage of deductible expenses."
Track all expenses, keep separate bank accounts, and consult with a tax professional. That way, you can lawfully deduct business expenses and potentially lower your overall tax bill. Potential deductions include:
- Home office expenses
- Internet and software costs
- Mileage and vehicle expenses
- Equipment and supplies
- Business travel and meals
Precise record-keeping is crucial for claiming these deductions and safeguarding yourself during an audit.
The Bottom Line
Don't wait until tax season to think about your tax strategy. Avoiding these common pitfalls - filing impulsively by April 15, gleefully accepting big refunds, and ignoring your side hustle's business aspects - can help you retain more of your money.
Instead, partner with a trusted tax advisor, file strategically (not hastily), and make full use of deductions and planning strategies year-round. Your future finances will thank you.
- The IRS agrees that not meeting the April 15 deadline isn't the end of the world, and it can be strategic to request a tax extension using Form 4868, especially when more time is needed to gather records.
- tax payment plans, such as installment agreements with the IRS, can help settle tax bills in manageable installments, allowing taxpayers to avoid penalties while effectively extending the tax payment deadline.
- When people engage in a side hustle, it's essential to treat it like a business, maintaining accurate records, separate bank accounts, and consulting with a tax professional to lawfully deduct expenses and potentially lower the overall tax bill.
- Strategically approaching personal-finance matters, like planning taxes year-round instead of during tax season alone, can help individuals retain more of their earnings by minimizing taxes, avoiding large refunds, and making full use of deductions and tax planning strategies. Additionally, staying vigilant against ransomware threats in one's finance-related activities can help protect personal and financial data.
